Afghanistan enlists faith-based banks to aid financial inclusion

May 7 (Reuters) - Afghanistan hopes its first Islamic bank will attract more players to its fledgling banking sector and help improve access to financial services in the country, a central bank official said on Monday.

Da Afghanistan Bank, the country’s central bank, granted its first Islamic license last month and is working on additional regulations to support banking that complies with principles such as bans on gambling and alcohol.

The Islamic Bank of Afghanistan (IBA), previously known as Bakhtar Bank, is now developing wealth management products and new digital banking services.

Financial inclusion is a challenge in developing economies and can be due to many factors, such as religion in Afghanistan, said Abdullah Ludeen, head of the Islamic banking division at Da Afghanistan Bank.

World Bank data shows that only 15 percent of adults in Afghanistan have a bank account, while 16 percent cite religious reasons for not having one.

“We expect that introducing Islamic banking can help address this issue,” said Ludeen, adding that such exclusion was tied to other factors such as financial literacy.

“There are good opportunities for Islamic banking in the country, its an untapped market,” he told Reuters in a phone interview.

Islamic banking regulations were introduced in 2015 and the central bank is now working on additional rules covering accounting and product development, said Ludeen.

Several local lenders have also inquired about converting their operations into fully-fledged Islamic banks although they have yet to submit applications, he added.

There are currently six banks that offer sharia compliant products through so-called Islamic windows and their conversion would require setting up an internal sharia board and having a clean bill of health.

The latter may be a challenge for some because of difficulties in converting impaired loans into Islamic equivalents, Ludeen said.

The lack of money market tools is also a factor.

“One potential issue is that we don’t have liquidity management tools for Islamic banks. Even for conventional banks its difficult to manage liquidity,” Ludeen said.

The government is also working on legislation that would allow for the issuance of sharia complaint debt instruments, known as sukuk, although such plans are still at a preliminary stage. (Reporting by Bernardo Vizcaino Editing by Darren Schuettler)